Consumer prices tame in February

Core CPI rate rises 0.1%, keeping yearly gain to 2.1%

This is an update to correct the number of housing starts reported by the Commerce Department.

WASHINGTON (MarketWatch) -- U.S. consumer price inflation was tame in February, the Labor Department reported Thursday, boosting expectations that the Federal Reserve would soon put an end to its interest rate increases.

The core CPI, meanwhile, increased 0.1%, a tick lower than the 0.2% gain expected by economists polled by MarketWatch. See Economic Calendar.

Financial markets rallied after the report. U.S. stocks opened with modest gains. Treasury prices rose, pushing the yield on the 10-year note to 4.70% from 4.73% on Wednesday. The dollar weakened slightly. See Market Snapshot.

The CPI has risen 3.6% in the past 12 months, down from 4% last month. The core rate is up 2.1% year-over-year, the same as in January.

The CPI rose 0.7% in January, when the core rate rose 0.2%.

In the past three months, the CPI has risen at a 2.7% annual rate, while core prices are rising at a 2% pace. Read the full report.

The report isn't likely to dissuade the Federal Reserve from raising its overnight lending rate by a quarter percentage point to 4.75% on March 28, but it could give Fed officials reason to believe that they have contained inflation pressures, thus forestalling further rate hikes. See our complete coverage of the Fed.

"While,there is no room for complacency, the Fed can take comfort in the fact that core inflation remains tame, despite some modest inflationary pressures," said Nariman Behravesh, chief economsit for Global Insight, who expects two more rate hikes.

"We still expect the Fed to raise rates to 5.25% by midyear on strong growth, high levels of resource utilization, and inflation at the high end of its comfort zone," said John Ryding, chief U.S. economist for Bear Stearns.

The Fed's preferred gauge of inflation - the core personal consumption expenditure price index - will be released by the Commerce Department on March 31.

Financial markets and analysts alike expect the Federal Open Market Committee to raise rates to 5% by the May meeting.

Monetary policy works with long lags, meaning that the impact of higher rates in March wouldn't be felt in the economy until 2007.

In a separate report, the Commerce Department said housing starts slowed as expected in February to a 2.12 million annual pace from a 32-year high in January. See full story.

In a separate report, the Labor Department said real hourly earnings (adjusted for inflation) increased 0.3% in February. In the past 12 months, both real hourly earnings and real weekly earnings are down 0.1%.

The Labor Department also said first-time applications for unemployment benefits rose by 5,000 last week to 309,000, the highest this year. Continuing claims fell by 49,000 to 2.45 million, the lowest in five years. See full story.

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